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800-662-9346(March 27, 2000) SUGAR: THE OUTLOOK FOR OCTOBER SUGAR--While the market action is still negative and sugar is still absorbing a huge production surplus from this season, the fundamental factors for the 2000/2001 crop season continue to improve. This may soon be a supportive factor for the long and drawn-out bear market in sugar. Lower production for new-crop Brazil, significant frost damage in China and flooding in Australia are factors that may provide some support.
Brazilian millers have apparently bought back export contracts of nearly 600,000 tonnes recently, as domestic prices have been on the rise due to tightening stocks ahead of harvest. While Brazil production may be down 15%-20%, exports could be down more significantly with increased alcohol production. A Brazilian consulting firm indicates that Center-South sugar exports for next year could drop from 11 million to near six million tonnes due to lower sugar production and higher usage for alcohol production. While gasoline in Brazil can legally contain 24% alcohol, traders suspect that sharply higher crude prices have caused plenty of "doctoring" of the mix.
Weather has taken its toll on the Chinese sugar crop and production is expected at only 7.1 million tonnes versus 8.53 million last year. China is expected to make up shortfalls with government owned storage, but many traders are looking for imports during the second half of the year. From a technical perspective, there is still no sign of a low in the market, as it has exhibited a series of lower highs and lower lows. Despite the recent shift in the fundamental outlook, with the bearish old-crop fundamentals still hanging over the market, it could take time for the market to turn. Wait for better technical action, but jump on board if the markets turn, as prices are historically cheap and speculators are heavily net-short.
SUGGESTED TRADING STRATEGY--Buy October sugar at 5.87 on a stop with 6.49 as initial upside objective. Risk 20 points from entry.
For daily market analysis of the Hightower Report's Comprehensive Commodity Research, call 900-225-2200, extension 6 for Softs Markets Forecast. The cost per minute is $1.33.
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